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April 24, 2018

Oil States Energy Services, LLC. v. Greene's Energy Group, LLC (2018)

Earlier today, the Supreme Court held in Oil States Energy Services, LLC v. Greene's Energy Group, LLC that inter partes review proceedings do not violate Article III or the Seventh Amendment of the Constitution. Justice Thomas, writing for the 7-2 majority, explained that a grant of a patent is a matter involving a public right. Moreover, because IPR proceedings involve the same basic matter as the grant of a patent, they also fall within the public rights doctrine. As a result, the Constitution does not prohibit the Patent Office from resolving issues of validity post issuance outside of an Article III Court. Important to the analysis was the lack of distinction between IPR proceedings and the initial grant of the patent because "[p]atent claims are granted subject to the qualifications that the PTO has 'the authority to reexamine – and perhaps cancel – a patent claim' in an inter partes review." Justice Breyer wrote a concurrence that was joined by Justices Ginsberg and Sotomayor. Even though he joined the Court's opinion in full, he wanted to stress that the decision should not be read as stating that matters involving private rights could never be adjudicated outside of Article III courts. Justice Gorsuch dissented, and was joined by the Chief Justice. In his dissent, Justice Gorsuch explained that the history of the patent system and the prior case law required the finding that patents are private rights, and therefore must be adjudicated in Article III courts.

We have previously explained the background of the Oil States case. Interestingly, this case was appealed from a Federal Circuit Rule 36 affirmance. Nevertheless, the Federal Circuit had previously considered the issue of the constitutionality of IPRs in MCM Portfolio LLC v. Hewlett-Packard Co. In that case, a three-judge panel concluded that because patents are public rights and "the grant of a patent is primarily a public concern," Congress was able to create administrative procedures for assessing their validity. This case was consistent with the Federal Circuit's decision in Patlex Corp. v. Mossinghoff, in which the Court had determined that ex parte reexaminations did not violate Article III of the constitution. Nevertheless, not all Federal Circuit judges appeared to agree with this conclusion. In a dissent to the denial of a petition for en banc hearing in Cascades Projection LLC v. Epson America, Inc., Judge Reyna explained that Supreme Court precedent was clear that only Article III courts had the authority to set aside or annul a patent right.

One of the cases that Judge Reyna cited, McCormick Harvesting Machine v. Aultman, was discussed at length in today's Supreme Court decision by both the majority and the dissent. And as we predicted, both sides pointed to McCormick Harvesting as either supporting their opinion (or at least not being in conflict with it). Justice Gorsuch pointed to the broad sweeping language from that case that stated "[t]he only authority competent to set a patent aside, or to annul it, or to correct it for any reason whatever, is vested in the courts of the United States, and not in the department which issued the patent." However, the majority correctly pointed out that this is "best read as a description of the statutory scheme that existed at that time," and did not address whether Congress had authority to establish an entirely different scheme. In fact, before the 1870 change to the patent statute discussed in that case, Congress did provide examiners with absolute discretion to cancel any reintroduced original claim in a reissue proceeding. It was the fact that Congress withdrew this grant of authority before McCormick Harvesting that made the Patent Office's cancellation of original claims in reissue proceedings a violation of due process and an invasion on the then-exclusive jurisdiction of the judicial branch by the executive.

The Court did stress, however, that its holding was limited to the question of the constitutionality of IPRs only. For example, the Court pointed out that "Oil States [did] not challenge the retroactive application of inter partes review, even though that procedure was not in place when its patent issued." This will almost certainly lead to continued constitutional challenges for patents that issued prior to the enactment of the AIA. In addition, the Court noted that it was not determining whether IPR proceedings raise due process concerns, which is interesting in view of the questioning about expanded panels during oral argument. Finally, the Court stressed that the holding should not be misconstrued to suggest that other constitutional challenges could not be made, for example challenges related to the Due Process Clause or the Takings Clause. These limitations to the holding virtually ensure that there will be continued challenges to particular IPR practices adopted by the PTAB.

A potential silver lining for Patent Owners is that the patent system appears to have a new friend in Justice Gorsuch. His dissent did an admirable job in pointing out the policy reasons that supported his conclusion. He stressed the time and cost of not only inventing something truly novel, but the additional resources necessary to apply for and obtain a patent. And this fails to capture any investment made to commercialize the patent in reliance of the patent rights. But as Justice Gorsuch put it, "what happens if someone later emerges from the woodwork, arguing that it was all a mistake and your patent should be canceled?" Of course, if true, the patent holder would not have been deserving of the patent in the first place. However, should "a political appointee and his administrative agents, instead of an independent judge, resolve the dispute?" This was the crux of his problem with the Court's decision. As Justice Gorsuch pointed out, the Director of the Patent Office serves at the pleasure of the President, and he supervises and pays the Board. The Director can select the APJs that will hear a case, determine how many will be on a particular panel, and even add more members to the panel if the decision is not to his liking. This problem can be solved by allowing Article III courts to be the only venue to resolve validity disputes of issued patents. As Justice Gorsuch put it, "when an independent Judiciary gives ground to bureaucrats in the adjudication of cases, the losers will often prove the unpopular and vulnerable." Instead of the judicial independence, we are at the risk of "armies of lobbyists and lawyers [that will] influence (and even capture) politically accountable bureaucracies." We can only hope that this doomsday scenario does not come to pass (and hope that the Federal Circuit will be a reliable backstop for any true abuse of power). But it will be interesting to see if Justice Gorsuch will continue to champion the patent system in future case (or whether it was just his distrust of the administrative state that brought him to the defense of patents in this case).

Comments

Gorsuch: "what happens if someone later emerges from the woodwork, arguing that it was all a mistake and your patent should be canceled?"

Well, so what? Everybody who has anything to do with patents knows the standards of patentability/validity, including that an obscure prior publication is just as potent a validity killer as an earlier US patent specification. This is the only way to be fair, as between the inventor and the public.

Would Judge Gorsuch have it otherwise? Does he grasp the consequences of what he is arguing for? Surely not!

The dissent of Justice Gorsuch is a tour de force in explaining the historical background, well worthy of an alumnus of University College, Oxford where he was a Marshall scholar and obtained a D Phil in law.

"Moreover, because IPR proceedings involve the same basic matter as the grant of a patent, they also fall within the public rights doctrine."

Hey Andrew,

That statement by the majority opinion is utter malarkey. The majority opinion has conflated the patent grant process (an examination) with the patent validity determination process (which is an adjudication, and which still, in my view and Gorsuch's, can only be properly carried out by an Article III court in view of a proper reading of McCormick Harvesting). Indeed, the majority opinion should have done its “legislative intent” homework. Congress', and especially the Senate's version of the AIA characterize IPRs, as well as the other post-grant proceedings as being adjudicative, whereas the grant of the patent is strictly an ex parte examination. See especially Matal’s, A Guide to the Legislative History of the America Invents Act, p. 443, footnote 53. To put it bluntly, the examination which grants the patent is in no way “the same basic matter” as an IPR adjudication. For the majority opinion to say otherwise so as to put a granted patent within the cross-hairs of the “public-rights doctrine," to use my later father's expression, "won't hold soap."